One of the strangest things about King v. Burwell is the challengers’ claim that the ACA clearly withholds tax credits from states that refused to set up exchanges. When asked why on earth Congress would do such a thing, the challengers insist that Congress badly wanted the states to establish their own exchanges. The tax credits were, on this view, a carrot to prompt state participation.
Some federal programs do work kind of like this. Medicaid, for example, dangles federal money to the states in order to encourage them to participate. If a state doesn’t accept the conditions that Congress places on receiving that money, then the state doesn’t get the money. In the lingo, Medicaid is a conditional spending program.
When it comes to the exchanges, however, the ACA is not a conditional spending program. And it’s not a close call: the ACA doesn’t look like any other conditional spending program in the U.S. Code. Together with Thomas Merrill, Gillian Metzger, and Abbe Gluck, I submitted an amicus brief to the Supreme Court explaining why. (Abbe developed some of these arguments in a blog post last year.)
For starters, Congress isn’t coy about what happens when a state fails to participate in a conditional spending program. It speaks clearly—the state doesn’t get the money—and that consequence is spelled out in a provision that speaks directly to states. That’s how the Medicaid statute works: when a state fails to play by Medicaid’s rules, “the Secretary [of HHS] shall notify such State agency that further payments will not be made to the State.” Direct and clear.
Now, there is a provision of the ACA that details the consequences of a state decision not to establish an exchange. It’s section 1321 of the Act, which includes a provision titled “[f]ailure to establish Exchange or implement requirements.” If Congress meant to level a threat at the states, that surely would have been the logical place to put it. Instead, as our amicus brief explains, “Congress kept all of  scrupulously free of any mention of this crucial consequence, while emphasizing … the States’ flexibility to decide, one way or the other, whether to set up Exchanges.”
The phrase “established by the state under 1311” isn’t in section 1321. It’s awkwardly crammed in subsections (b)(2)(A) and (c)(2)(A) of a section of Subpart C of part IV of subchapter A of chapter 1 of the Internal Revenue Code. And it’s in a provision that’s directed to individual taxpayers, not to states. There’s nothing clear or direct about that. No wonder that the states, when they were deciding to establish exchanges, had no idea that tax credits hung in the balance.
Stranger still, the challengers say that Congress also threatened to devastate state insurance markets if the states didn’t establish exchanges. Under the ACA, no insurer—whether they’re in states with their own exchanges or not—can discriminate against sick people. Without tax credits, however, lots of healthy people couldn’t afford to keep their coverage. Because sick people would stay in the market, insurance premiums would skyrocket. You’d get what RAND calls a “near death spiral.”
In short, states that didn’t play ball with the federal government would have basket-case insurance markets. The states would be much worse off than if the federal government had never made the offer at all. But that’s not the way conditional spending programs typically work. When states don’t take federal money, they just lose the money. Congress doesn’t also beat them with a stick. And it certainly doesn’t hide the stick so cunningly that the states never even notice.
Instead, the ACA’s exchange provisions adhere to a different—but very common—model of federal-state interaction: a model of cooperative federalism. Under such a scheme, Congress sets a national policy but invites the states to implement that policy themselves. If the states decline to do so, the federal government implements the policy on their behalf. That’s how the Clean Air Act works, for example. The states can decide how best to meet certain nationally applicable standards, but, if they don’t, the federal government will do it for them.
The ACA is a straightforward example of cooperative federalism. Congress set a national policy and gave states the “flexibility”—that’s the word the ACA uses repeatedly—to establish state-based exchanges. If the states refused, however, the federal government would create a back-up exchange. That’s the reading that makes the best sense of the statutory text. And it’s a reading that imputes to Congress an attitude that was genuinely respectful of the states: one that invited their participation if they wished, but let them off the hook if they didn’t.
The challengers, however, would have you believe that Congress wanted to surreptitiously put the states in a straitjacket. Any number of Supreme Court cases—including Pennhurst, Gregory, Bond, and Gonzales—require Congress to speak with much greater clarity before the courts will impute to it the desire to behave so disrespectfully toward the states. There is nothing like that kind of clarity in the ACA.